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Brazil: Restriction in royalties remittance

Recently, the Brazilian Trademark Office (BTO) has taken some controversial decisions regarding the limitation of the percentage of royalties to be remitted abroad, as payment for technology transfers agreements.

The payments between a Brazilian subsidiary and its foreign parent company started to be authorized as a result of Law 4.131/62 in 1991. Concerning tax issues, rules established in Ordinance 436 of Dec. 30th, 1958, were applied.

It establishes the maximum coefficient of percentages allowed for tax deduction of the amounts paid as royalties for the exploitation of trademarks and patents, technical, scientific, administrative assistance and the like; depending on the technological area involved, those percentages may vary from 1% to 5%.

Because of its legal attribution of registering agreements that involve transfer of technology, as well as franchising, the BTO started to limit the percentages of royalties when the relevant agreements involve related companies, whereby the foreign parent company holds, directly or indirectly, the control of the voting capital of its Brazilian subsidiary.

The main question that was brought again into discussion, in view of this position by the BTO, is: may that agency overrun the parties’ will? Or should it merely act as a registering agent, without imposing restrictions or making judgments on the various contractual provisions?

This latter position, however, has weakened in time, inasmuch as, from a purely constitutional point of view, the public authority has the prerogative and the duty to rule against abusive clauses, especially those related to payment in foreign currency.

Thus, the BTO has a fundamental role, considering that only after the registration of the transfer of technology agreements, can their corresponding royalties be validly remitted abroad.

The way the public authority acts is justified by the need of the State to “protect” the technology recipient as the “less strong” party, always aiming at obtaining innovation and technological expertise to enhance social, economic and technological development.

This question is already being discussed by the Brazilian courts, which have recognized the BTO’s authority to intervene in transfer of technology agreements, in the spirit of regulating the economic order.

The purpose is to avoid the country to become a mere recipient of technology due to cheaper labor costs, without the expected benefits of actually receiving foreign technology for professional capability.